Is paying off mortgage early beneficial? If you are considering getting the monkey off your back quickly, there are a lot of things that you need to consider. While paying it off prematurely can work for some, it may not be viable for others. Let us take a look at some tips which will help you in deciding whether paying it off at once can help you in your finances.
As the sub-prime crisis is nearing its end and people are finding themselves in a better financial condition, many of them are planning to pay off their loans prematurely, primarily to have a better sense of financial security, and peace of mind. There are others who think that paying off mortgage early is not exactly a wise thing to do as the money required to pay off the debt can be used to invest in other avenues for better returns, e.g. the stock market. With the dollar eroding continuously, the mortgage payment that you are making right now, might not seem a big deal 10 years down the line. This is one of the reasons people have in support of their argument of not paying off mortgage early. People are in a dilemma whether to invest or pay off their debts.
Pros and Cons of Paying Off Mortgage Early
As we mentioned before, some people want to get rid of their debts so that they can finally heave a sigh of relief that the home that they are living in is theirs completely. Apart from this, there are several other financial benefits of paying off mortgage early, let us take a look at some of these benefits.
- Paying off mortgage early reduces your cost of living. Every month when you pay your loans, the bank takes its piece by charging you an interest. You can eliminate this interest by paying off the debt at one go and then look at some other options of investment.
- If you have a mortgage term of 30 years, you will have to hold on to your job, come what may to pay off the loan. In case of a job loss, the biggest liability that one has is the monthly mortgage payments. You miss a couple of payments and you run the risk of a foreclosure.
- Paying off mortgage early has a positive effect on your credit rating and you will qualify for more credit.
- Home loans have the lowest interest rates when compared to other debts like credit cards, personal loans. Many people are of the opinion that one should first try and pay off these high interest loans and then think about paying off mortgage loans.
- As soon as you pay off your mortgage, the tax benefits that you have, would be taken off. Mortgage interest tax deductibility helps you cut down on your taxes if you fall in a large tax bracket.
- The kind of money that goes into clearing off the mortgage debt can be used to invest in some other avenues which will not only take care of your monthly mortgage payments, but you also end up making a healthy profit
- There are some unforeseen situations in everyone’s life and it is necessary to have a back-up or an emergency fund so that these situations can be dealt with. Paying off mortgage early can mean all your savings are used in clearing the debt and you are left with little or no money in case of adversities like job loss, illness, etc.
Strategies for Paying Off Mortgage Early
Paying off a mortgage early is easier said than done and takes a lot of planning and effort from your side, not to forget the compromises one has to make. Let us take a look at some of the tips for paying off mortgage early.
- Pay extra every month and you knock some years off your mortgage debt. If you cut down on your shopping sprees and vacations, and pump in an extra $100 to $150 once or twice a year, you will be reducing the tenure of your loan. One thing that you need to make sure is that to write a separate prepayment on principal check, so that the bank does not put it on next month’s interest payments.
- The new bi-weekly approach to mortgage payments has become a popular option today. When you pay once a month, you make 12 payments in a year, but when you switch over to bi-weekly payments, you end up making 26 payments in a year. This can also effectively reduce your loan duration.
- Make an annual lump-sum payment whenever you get a tax benefit or a work bonus. Do inform your banker before making this lump-sum payment as banks may have certain parameters on how many extra payments you can make.
Paying off mortgage early is an individualistic decision and what might be feasible for one may not work for another. It is very important to be aware of the latest changes in the economy so that you are well informed about what influences mortgage rates, and tax policies, etc. In the end, we will again advise you to carefully weigh in all your other priorities and liabilities before you decide about paying off your mortgage early.